US praise for ASIC’s ‘dark pools’ stance

The Australian market regulator’s move to police “dark pools" has struck a chord in the US, where the dominant stock exchange has been pushing for greater transparency in the opaque trading venues, according to a senior executive at the New York Stock Exchange.

Joe Mecane, the head of US equities at NYSE Euronext, the owner of the New York Stock Exchange, praised the actions of the Australian Securities and Investments Commission.

“I think it is a global topic of conversation and I think the issues that are being tackled are pervasive in every market. I think regulators have slightly different views on some of the specifics," Mr Mecane told The Australian Financial Review.

“But when we saw the [ASIC] report come out and went through it, we were pleasantly surprised that a lot of the recommendations that ASIC made were very consistent with a lot of the points that we have been making."

Dark pools are private exchanges where investors can trade shares among themselves, away from the open sharemarket. In a major report last month, ASIC found that the growing use of dark pools had the potential to undermine the quality of the market. There was also evidence of “toxic" behaviour by some dark pool operators, such as favouring some traders over others.

As part of tough new measures, ASIC will require dark pools to be more transparent about their activities and is also considering a ban on smaller-sized trades in the venues to protect less sophisticated retail investors.

In an interview from New York, Mr Mecane said ASIC’s finding had struck a chord in the US, where 40 per cent of trading volume takes place off the sharemarket. “They [ASIC] highlighted some of the non-transparent practices that exist in those pools and that they are essentially mini-exchanges that aren’t regulated as exchanges," he said. “Essentially the recommendations that they made in the report are that they [dark pools] have to be more transparent, make disclosure, do a lot of the things that exchanges have to do, and that is something we have been arguing for a long time. We have called it the level playing field argument."

Somewhat accidentally complex

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Much of the concern about dark pools in Australia stems from a fear that the local market will go down the path of the US, where some see the number of alternative trading venues as out of control. The US has some 60 alternative trading venues such as dark pools competing with 13 “lit" exchanges.

Mr Mecane said some of the criticism levelled at the US was unfounded, but he acknowledged that the market had become fragmented and overly complex. “On the one hand, I would partly at least defend the US markets as being liquid and fairly resilient and on most days operating with high efficiency," Mr Mecane said. “But a common criticism of the US markets – and we have shared this criticism – is that somewhat accidentally the markets have become highly complex.

“There are upwards of 50 venues that are executing orders, roughly 40 per cent of the market is not transacted on exchanges, there is an extensive level of customer segmentation on a lot of those venues, and the level of complexity is in a lot of ways unnecessary."

The deal, announced in December, came a year after European authorities blocked a takeover of NYSE Euronext by Germany’s Deutsche Boerse.

Mr Mecane said he did not have a view on whether the Australian Securities Exchange would become involved in another international deal after a takeover by the Singapore Exchange was rejected by the federal government in 2011. “It seems that the driver at least for our deals has been around mainly the strategic benefits and the strategic rationale that leads to a decision that it makes sense to put two organisations together," he said.

“I think whether it continues and spreads to other countries, venues and jurisdictions will depend largely on what value can be created for shareholders through combining the different operations, and not just merging for the sake of merging or merging to create a bigger organisation for the sake of creating a bigger organisation."